US should look to Canada for economic inspiration

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Canada was called an “honorary member of the Third World” by the Wall Street Journal in 1995, and for good reason. Out-of-control spending, soaring debt and the government’s bite of the country’s gross domestic product growing at a furious pace — those trends prompted the Journal’s harsh putdown. Sound familiar? Those are exactly the trends that endanger America’s economy and standard of living today.

Only with Canada, there’s a difference. Beginning in the mid-1990s, Canadians came to grips with their fiscal crisis. They cut spending at both the national and provincial (state) level, reduced the size and payroll of government, slashed debt, and produced what Paul Martin, then finance minister and later prime minister, called smaller, smarter government.

Canada is now in a far better economic situation than the United States. Its unemployment rate is lower, its budget deficit breathtakingly smaller (after nearly a decade of balanced budgets), its debt burden far lighter, its banks more stable. The Canadian dollar, once worth as little as 62 cents, is currently nearly at parity with the American dollar.

One lesson from Canada is that major fiscal reform requires bipartisanship, with the initiative better coming from liberals than conservatives. It was the left-of-center Liberal party, facing what was described as “nightmarish debt and deficits,” that led the way with an austere budget in 1995. Conservatives, divided at the time, were supportive.

There’s a simple explanation for the need for liberal leadership. If conservatives propose to cut spending and downsize government, reflexive liberal opposition can be expected. But if liberals advocate a similar approach, they’re likely to be supported by many of their liberal allies and by almost all conservatives.

At least that’s the way it worked in Canada, with impressive results. In Washington, however, the liberals in charge — that is, President Barack Obama and Democrats in Congress — are moving in the opposite direction. Rather than retrench, they want to spend and borrow more.

Or perhaps it’s because the United States hasn’t reached the dire situation that Canada faced in the early 1990s after years of breakneck spending and borrowing. Government and public debt combined reached 53 percent of GDP in 1992, and Canada’s future looked grim. The d-word was increasingly mentioned — default.

Canadian banks, in contrast with American financial institutions, received no bailouts in the banking crisis of 2008 and aren’t targeted for a wave of new regulations. With a conservative banking culture, Canada largely avoided a housing bubble.

The Canadian economy did slip into recession, and the Conservative government of Prime Minister Stephen Harper, in power since 2006, provided a stimulus. It was unlike Obama’s in an important respect. It was purely temporary. Obama’s stimulus spending has raised the baseline of permanent spending.

Canada stands to benefit further from its conservative agenda. The country has higher tax rates, but if Harper stays in office another four or five years and Obama wins a second term, Canada may “emerge as the lower tax jurisdiction,” thinks Frum. All the better for a country already poised to play a bigger role in the global economy.

Fred Barnes is executive editor of The Weekly Standard, where this article originally appeared.